Suppose iPhones cost 180 euros and 240 dollars in Belgium and the United States, respectively, while binoculars cost 60 euros and 75 dollars in Belgium and the United States, respectively. If the exchange rate is 0.75 euros/dollar, the law of one price ________ for iPhones and ________ for binoculars.

Question

Quizplus · Accepted Answer

The law of one price states that identical goods should have the same price in different markets when converted to a common currency. In this case, iPhones cost 180 euros in Belgium and 240 dollars in the US. Using the exchange rate of 0.75 euros/dollar, we can convert the US price to euros: 
240 dollars * 0.75 euros/dollar = 180 euros 
Thus, the law of one price holds for iPhones. 
However, for binoculars, the law of one price does not hold since they cost 60 euros in Belgium and 75 dollars in the US. Converting the US price to euros: 
75 dollars * 0.75 euros/dollar = 56.25 euros 
This shows that the price of binoculars is not the same in both markets, so the law of one price does not hold for binoculars.

Suppose IPhones Cost 180 Euros and 240 Dollars in Belgium